Buying And Selling Precious Metals On "The Spread"

[I believe you should only purchase precious metals with "non-committed" money.  Your monthly bills are paid, you've got a cash reserve available for emergencies, and things like a "new car fund" or "new house fund" are fully funded.  PM's should be a part of - and not the entirety of - your financial security plan.]


One of the most common questions I get in our Precious Metals (PM) store is, "If I buy this coin today, how much would you pay me to buy it back?"

Great damned question, and I wish more folks thought this way.  My answer usually goes something like this:.  "Well, it depends.  Grab a cup of coffee and a chair, and I'll explain."

Let's say the PM in question is a 1 ounce generic silver round.  These are private mint bullion, and very popular with buyers.  We typically sell these coins for $2 to $3 over the spot price of silver.

I tell them that if we're in a flat market (low price fluctuation over the past week or so), I'd be buying the coin back at around $2 under spot.  

If we're in a rising market, I'd be buying them for between spot and $1 under spot.  Since the market is rising, my market risk is minimized, and I pass the reduced cost of that risk on to my customers.

If we're in a declining market, I'd be buying them for anywhere between $3 and $4 below spot.  Since the market is declining, my market risk is increased, and I pass the increased cost of that risk on to my customers.

What I'm trying to do is maintain a profit margin of around $3.50 to $4 per coin.  That's how I keep my doors open.
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If you walk into a PM store, and get the spread information, how do you know if it's reasonable?  You can get a feel by checking online sources.

You're going to use this information for two reasons:  To see what an online spread is, and to see what types of bullion have the smallest spread.  A smaller spread tends to indicate a coin with a more liquid market.  A more liquid market means you will be able to sell your bullion more easily in the future.

If I go to APMEX.com, I see that silver is $20.15 per ounce.  Here's what I can glean from the site:

At first blush, it appears as though junk silver is the clear winner.  And it is!  Its spread is $1.11 below the nearest alternative, and it's got the lowest per-ounce cost.  Over the past few years, normal spreads have been pretty close to what you see here.

[Note:  If you're going to buy junk silver for the first time, read our tutorial ("Buying 90 Percent Silver Coins") so you're going into the transaction knowing what you're talking about.]

That being said, if you were selling your stash right now, you'd be wishing you had nothing but American Silver Eagles.  They are always afforded the highest premium.

So, diversify.  Just like you don't want all of your savings in gold and silver, you don't want all of your silver, for instance, in junk silver.  When it comes time to sell, you want to be able to sell the fewest number of ounces for the greatest number of dollars.

You're buying right now to sell into an unknown future market.  You want to be able to maximize your money when it comes time to sell.

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I"ll occasionally get the response, "I can get silver rounds for less than that.  Can you meet their price?"  I ask them where they saw the price, and it's always from an online source.

I tell them that if price is their only concern, they SHOULD buy online.  Their cost-per-coin savings won't be quite what they think, as they'll have to pay for shipping and insurance, but it could still be lower than my price.

I tell them that what they're buying from me is more than silver.  They're also buying peace of mind.

If they buy from an online source, their name, address, phone number, email address, credit card information, and the contents of their purchase are now on AT LEAST two lists - one with the online seller and one with the credit card company.  The delivery company will also show a transaction between Mega Bullion Dealer and you.

I tell them that if they buy from us and use cash, no one outside of the transaction knows they were even in the store.  We use the "Walmart underwear" analogy:  When you go to Walmart to buy underwear with cash, you don't give them your name.  You just buy your underwear and leave.  If you don't want your name on your PM purchase receipt, we don't put it.

If they use a debit card, there IS an electronic record that they spent money in our store, but not what they bought.  It could have been bullion or a bracelet.

Finally - and what I think is just as important as the anonymity aspect - is that they walk out with their purchase.  Their gold or silver is in their safe as soon as they get home.

So yes, peace of mind has a price, but most folks think it's a reasonable one.
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Along these lines, I IMPLORE my customers to attempt to buy the highest valued gold and silver for the least amount of money.  That requires them to ask me a simple question:  "What's on sale?"

We ALWAYS have something that is priced lower than normal.  We may have bought a large lot from an estate sale or some other similar purchase.  We will see this very often when we buy foreign gold and silver.  You can at times buy foreign bullion at very near the spot price of gold or only a couple of percentage points higher.

Don't go into the store with a set item to be purchased.  Go in with a set amount you want to spend, and walk away with the largest number of ounces possible.

Also, each state has different rules regarding sales tax.  In California, if you buy at least $1500 worth of bullion, the entire purchase is non-taxable.  I recently found that in Nevada, if the coin has a denomination ($1, $50, etc.) they have to tax you when you buy those.  So, let's say your options are a 1 ounce American Gold Eagle versus a 1 ounce Kruggerand or a 1 ounce Pamp Suisse gold bar.  In Nevada, you'd have to pay sales tax on the Gold Eagle (with its $50 denomination), but not on the Kruggerand or the privately minted Pamp Suisse bar.

You can be talking about some serious dollars depending on how much you're buying.  I'm guessing that private mint silver and gold have a much more liquid market in Nevada than do Gold Eagles, Maple Leafs and Pandas.

Do your homework before making a purchase!  What are the rules in YOUR state?

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Copyright 2013 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates. www.BisonRMA.com